Higher royalty & dull results take sheen off HUL

SummaryConsumer goods company Hindustan Unilever said on Tuesday it had agreed to enter into a revised royalty deal with Unilever on technology, services and trademark licences provided by its Anglo-Dutch parent.

Consumer goods company Hindustan Unilever (HUL) said on Tuesday it had agreed to enter into a revised royalty deal with Unilever on technology, services and trademark licences provided by its Anglo-Dutch parent.

The new agreement will increase royalty costs, in a phased manner, to 3.15% of total sales by March 2018, from the current 1.4% of turnover for HUL. The increase in royalty cost in the period from February 1, 2013, to March 31, 2014, is expected to be 0.5% of turnover, and thereafter in a range of 0.3% to 0.7% of total sales in each financial year, HUL said.

The announcement, together with a disappointing set of numbers for the December 2012 quarter, pushed the HUL scrip down more than 6% on the BSE.

Investors in the Indian arms of MNCs have given a thumbs-down to recent moves to hike royalty payments. Following opposition from shareholders, ACC has decided to seek shareholder approval through postal ballot, as part of a “good corporate governance practice”, even though the royalty issue can be essentially decided by the board, it said on January 9. Boards of cement companies ACC and Ambuja Cements, controlled by Switzerland-based Holcim, recently increased royalty payments on technology and knowhow to its parent firms. The two Indian cement companies are now required to pay 1% of their total sales as royalty to their parent company.

In December 2009, the government through press note 8, freed up caps for payments for foreign technology collaborations and royalty fees under the automatic route, including lump sum payments for transfer of technology, payments for the use of trademark and brand name. Foreign sponsors who earlier required government approval for charging royalty under the various heads were now free to charge any amount as royalty to their Indian subsidiaries.

The top 20 royalty paying companies now remit R3,601 crore, up from R1,196 crore five years ago. A study conducted by IIAS found that total royalty for 25 companies has increased to R3,635 crore in 2011-12, up from R1,528 crore in 2007-08. Maruti Suzuki has consistently paid the highest royalty and the R1,803 crore paid in FY12 accounts for 5.2% of its net sales.

HUL pays royalties on specific brands, where Unilever owns the patents and pays royalties on sales of products manufactured with technical inputs developed by Unilever. HUL had a turnover of R22,116 crore for the fiscal 2011-12. Over a two year period, the Sensex has returned